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AIM listed compliance and banking software group Lombard Risk Management (LSE:LRM) has this morning served up a pretty upbeat trading statement saying that first half ( to September 30th) numbers will be slightly ahead of expectations, that it has just won a major contract and has a strong pipeline. That is what we see. There is more to come. And here is why…
I wrote up a detailed piece on Lombard on September 25th. I originally tipped the shares at 9.625p back in January 2005. On the 25th I advised you to buy at 9.25p ( admitting that Lombard had not exactly served up the goods over the past seven years but arguing that it would this time around. I hope you did pick up a few at 9.25p ten days ago as the shares are now 9.75p and I reckon that they should double ( or more) from here.
You can read my last piece HERE
Today’s RNS reads:
The Company is pleased to announce that it has signed a substantial contract to supply its Dodd-Frank and EMIR (European Market Infrastructure Regulation) transactional reporting products to a major European bank. No revenue from this contract has been recognised in the half year results.The Company continues to see strong interest across its product range and remains in discussions with a number of major financial institutions in the UK and abroad.
The Board confirms that trading was slightly ahead of management forecasts for the six month period to 30 September 2012. The performance to date gives the Board reason to believe that the Company will meet market expectations for the year ending 31 March 2013. The Company will release its interim results on Wednesday 24 October 2012.
Clearly much can happen in the next six months and so Lombard would rather surprise on the upside at the full year stage than nudge analysts to increase forecasts now. This is called “managing expectations.” Given how Lombard has missed targets too often in the past this is probably sensible. And so there is no need to tweak forecasts just yet but there is clearly far more confidence that they will be, at least, met.
The forecasts below come from broker Charles Stanley
| Key financial data (£m) – IFRS | |||||
| Year to March | 2011A | 2012A | 2013E | 2014E | 2015E |
| Sales | 11.8 | 12.8 | 17.4 | 20.4 | 23.4 |
| PBT normalised | 0.6 | 2.5 | 4.6 | 5.8 | 7.5 |
| EPS normalised | 0.62 | 1.16 | 1.74 | 2.02 | 2.54 |
| DPS paid | 0.00 | 0.05 | 0.08 | 0.11 | 0.12 |
| PER (x) | 14.9 | 7.9 | 5.3 | 4.6 | 3.6 |
Ten days ago I concluded thus:
And so I’d say that, for now, 10 times next year’s earnings (20.2p) is a fair valuation. If Lombard can hit forecasts two or three times in a row the potential for a material re-rating is very real. But for now a forward PE of 10 is probably fair. For what it is worth Charles Stanley analyst Peter McNally has a 16p target. Either way, at 9.25p, I’d be a buyer
With the shares now at 9.75p my conclusion is the same.
For goodness sake.
LRM switched from opexing it’s R&D to capexing it, recently. That will horribly flatter “earnings” until a full depreciation charge is taken in later years. Cash flow will be miles behind “profit” in the interim period (next 4-5 years).
Quoting a P/E ratio for next year’s numbers is, IMVHO, a complete nonsense. Price/cash flow is the one to use until the capexing of R&D and corresponding depreciation charge normalise in about 4 year’s time.